Entrepreneurs are often very busy in their daily lives, passionate about their work and do not think about preparing for retirement. However, selling the business in which you have invested your whole life is a complex and crucial task in order to be able to afford a good retirement. And this needs to be planned a few years in advance if you want to be able to save up to more than $900,000 in taxes.
Luc*, 63, is an electrician and has his own business. He is the only shareholder. His wife, Chantal*, 62, works in the company’s administration and his son Éric*, an electrician, is also employed there. Luc recently received a purchase offer for his company from outside. “I didn’t expect that at all,” he says. I wondered what to do. It sort of woke me up. I figured I would have to talk to my son first to see if he was interested in taking over the business. » Luc also has a management company where he deposits the accumulated profits of the electricity company. He wonders what steps must be taken to sell his business and retire comfortably, allowing him to enjoy the fruits of his efforts throughout his working life.
Julie Paquin, financial planner and vice-president, private management at Optimum Investment Management, is not surprised by Luc’s somewhat late realization. “Entrepreneurs are often absorbed in their daily activities, business development, administration, so they do not stop at questions related to the possible sale of their business,” she says. Now, this is very important. Preparing for the transaction takes about five years, two of which are really crucial to qualifying for a tax exemption of up to $971,190. »
Then indeed, before considering an external offer to purchase the business, Julie Paquin strongly advises Luc to have a discussion with his son to explore his interest in taking over the business.
“Maybe he’s not interested at all and wants to stay employed,” says the financial planner. But you have to know your intentions to avoid causing family tension. Then, if Eric wishes to take over the business, it will be necessary to look at whether he has the necessary skills to become an entrepreneur and the financial capacities to achieve his ambitions. »
To find out, Luc will need to know how much his business is worth. “He must find an approved appraiser to carry out this work,” says Julie Paquin.
The capital gains deduction provided for when the shares of an eligible small business are sold could therefore make all the difference for him.
“Normally, capital gains are taxable at 50%, but the government put this deduction in place to give a boost to small business owners who have often worked very hard and always reinvested money. money in their business, explains Julie Paquin. But there are several conditions to meet in order to be eligible. »
One of the important elements to prepare to take advantage of this tax deduction is that 90% of the income held in the company must be active at the time of the sale of the shares. “Often, there is a lot of money accumulated in mature companies,” notes Julie Paquin. We have to take it out. For example, Luc could transfer the passive assets to his management company, or pay himself a higher salary and contribute to his RRSP to reduce the tax payable. His accountant or tax specialist is the best person to make recommendations. »
Also, for at least two years before the sale, the share must have belonged to the individual or a person related to him, therefore here to Luc or his wife, and more than 50% of the fair market value of the property of the business must have been used for its active operation.
“It is essential that Luc takes the time to look at his situation in detail with an accountant or a tax professional to ensure he complies with all the conditions,” specifies the financial planner. This is an important tax advantage and it must be provided for. »
If, ultimately, Luc does not have all the money he will need by selling his business, he could consider different solutions. For example, continuing to work in the company even if it has been sold.
“Often, this is what the buyer wants, because the founder is the one who knows the customers and suppliers best,” indicates Julie Paquin. It’s interesting that there is some time left to ease the transition. But it is also a challenge, because the person who founded the company and who has managed it all his life may have difficulty delegating and reviewing his ways of doing things. The important thing is that Luc surrounds himself with different experts to support him, both financially and humanly, in the different stages that will lead him to the sale of his business. »